California Quest Falls Short as Ukraine Debt Talks Drag On

After a 6,000-mile trip to the doorstep of her largest creditor and two days of talks, Ukrainian Finance Minister Natalie Jaresko is heading home without a deal as time runs out to avert a default.

The government and creditors led by Franklin Templeton were said to have agreed to continue negotiations remotely and issued a joint statement on Friday to show there’s no irreversible breakdown. But Ukraine is short on time to restructure $19 billion of debt after five months of sometimes acrimonious talks. Its economy is languishing amid signs of a pickup in separatist unrest in the country’s easternmost regions.

The two-sentence statement left little scope to “read between the lines” on the state of progress, Nomura Holdings Inc. strategist Tim Ash said by e-mail. Ukraine, which needs to execute an agreement before a $500 million note falls due on Sept. 23, said Aug. 7 that this week marked the “final opportunity” for an accord.

“It’s a good sign that they are continuing discussions and not blaming each other for lack of cooperation,” said Jakob Christensen, an analyst at Exotix Partners in London, who expects creditors and the government will eventually settle on a 22.5 percent writedown to the face value of bonds.

The eastern European nation warned on Friday that pro-Russian rebels shelled the army more actively than at any time in the past six months and may be planning a fresh offensive. The economy shrank 14.7 percent in the second quarter from a year earlier and is poised for the worst contraction in Europe, the Middle East and Africa this year.

Default Risk

Bonds ended a three-day rally as some traders said the lack of clear progress raised the likelihood Ukraine will act on a threat to freeze debt payments. The nation is the most likely sovereign to default in the next 12 months, according to Bloomberg sovereign risk analysis.

Ukraine’s $2.6 billion Eurobond due July 2017 fell 0.33 cent to 57.40 cents on the dollar by 6:04 p.m. in Kiev.

“It’s a pity that after flying so far, Jaresko will leave with nothing,” Vitaliy Sivach, a Kiev-based bond trader at Investment Capital Ukraine, said by e-mail. “It looks like it’s time to prepare for Plan B -- to default.”

Others, including Vadim Khramov, an economist at Bank of America Merrill Lynch, were optimistic, particularly since the two sides released a joint statement, indicating they may be on the same page. Discussions in San Francisco were “detailed” and talks are “ongoing,” according to Friday’s release.

Ukraine needs to save $15.3 billion in debt-servicing costs over four years as part of conditions set out under a $17.5 billion International Monetary Fund loan.

Narrowing Gap

The gap between the two sides has narrowed since June, when Ukraine was said to be seeking a 40 percent writedown, while creditors insisted on no losses. Before this week’s talks, people with knowledge of the negotiations said creditors were offering 5 percent and the government was willing to ease its demands.

Optimism that Franklin Templeton will succeed at securing terms favorable to bondholders helped push the 2017 notes up 1.9 cents this week alone. Ukraine’s Eurobonds have returned 4.9 percent in the past month, the most in a Bloomberg emerging-market bond index.

The four-member committee, which owns just under half of Ukraine’s Eurobonds, also includes BTG Pactual Europe LLP, TCW Investment Management Co. and T. Rowe Price Associates Inc. Russia is Ukraine’s second-largest creditor and has said it will take the country to court if it fails to repay the $3 billion note when it matures in December.

“Bondholders and the government could have agreed in principle on some baseline restructuring scenarios, but it usually takes time to study and compare proposals from both sides in detail,” Khramov, who expects a final deal that involves a 20 percent writedown, said by phone.